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Source link: http://archive.mises.org/13344/rothbard-and-liquidity-traps/

Rothbard and Liquidity Traps

July 20, 2010 by

Is there really a true “Keynesian Case” in which the economy falls into a “Liquidity Trap”? Murray Rothbard did not think so, and I deal with this issue in this KIW blog post.


Ohhh Henry July 20, 2010 at 9:19 pm

Left-socialist-Keynesian-crank economists are always ready to believe that they have found a special corner case or other kind of exceptional circumstance where the law of supply and demand doesn’t work, in which case government intervention is required in order to fix the broken machinery of the laws of economics. People saving their own money is actually miserly, greedy “hoarding”, and the slight time lag between the termination of bad investments and the reallocation of resources into better investments is a deadly “trap”. Therefore one must punish savers and avoid at all costs the liquidation of malinvestments – but only when these conditions are correctly identified by those sufficiently trained in Defense Against the Dark Arts.

The simple laws of human action as applied to the peaceful exchange of goods and services are highly unsatisfying to these economists, because they do not assign to them a sufficiently prestigious place in the scheme of things, finding black holes and quantum mysteries and then solving them to the applause of millions. They would hate to lose their jobs at the Ministry of Magic.

Dick Fox July 21, 2010 at 4:28 pm

I have always found the Keynesian concept of the “Liquidity Trap” interesting. Basically it says that Keynesian theory of interest rate manipulation does not work. The theory is that you reduce interest rates to stimulate the economy but if you reach zero you are caught in the trap. Well if it doesn’t work even when you run out of stimulant I guess it doesn’t work does it.

It was interesting that in 2002 Bernanke said that he had a lot of other tools if the interest rates reached the zero limit but he didn’t think it would reach that point. Well, guess what Ben? We are there. And Ben, if those other ideas are so good after we reach the zero limit why didn’t we do them first?

Bottom line is these guys are living in a fantasy world where their theory fails and they continue to work to find other ways to satisfy their theory. Jude Wanniski always said that Keynesiansand monetarists were not dangerous until their theories didn’t work. It was their reaction to the failure, trying to make them work,that caused all the damage.

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